As global energy markets fluctuate, investors are increasingly seeking opportunities beyond traditional oil giants like Exxon Mobil (XOM) and Chevron (CVX), which currently yield between 3% and 4%. Instead, there is a growing interest in diversified energy funds that provide significantly higher dividends, ranging from 7% to 9%. The current geopolitical climate, particularly in the Middle East, coupled with the Federal Reserve’s “no landing” scenario and the People’s Bank of China engaging in aggressive monetary policy, suggests a potential upswing for oil investments. This analysis will delve into three closed-end funds (CEFs) that present noteworthy opportunities within this context, all of which trade at discounts to their net asset values (NAVs).
The first of these funds is the BlackRock Energy & Resources Trust (BGR), which offers diversification within the energy sector by investing primarily in U.S. integrated energy majors and international energy stocks. With a portfolio consisting of less than 30 holdings, BGR maintains a concentrated approach where major companies like Exxon and Shell dominate its asset allocation. Notably, BGR operates without any debt leverage and employs a covered call strategy, which enhances its ability to provide an attractive yield of approximately 7% through monthly distributions. However, this strategy also means investors experience limited upside in bull markets, as the fund insulates itself against drastic declines but may underperform during periods of significant price appreciation.
Another option for income-focused investors is the Adams Natural Resources Fund (PEO), established in 1929, which boasts an impressive history of consistent shareholder distributions for over 80 years. This fund holds nearly 60 positions, including energy blue chips such as Chevron, Schlumberger, and Marathon Petroleum, alongside some exposure to chemical and industrial sectors. PEO utilizes minimal leverage, making it a more stable investment compared to BGR, although it does not employ options trading strategies. Trading at an 11% discount to NAV, the fund has the potential for better purchasing opportunities, as its historical average discount has been above 14%. While PEO may lack the extensive volatility of other funds, it occasionally provides outperformance compared to its peers.
The ClearBridge Energy Midstream Opportunity Fund (EMO) rounds out this analysis, focusing primarily on midstream energy infrastructure providers, including master limited partnerships (MLPs). The fund features significant holdings in pipeline and storage companies, thus capitalizing on steady income streams generated from energy transport and storage. EMO’s performance is generally correlated with MLP ETFs, as the fund primarily comprises these partnerships. While the fund currently trades at about 90 cents on the dollar, it has experienced much larger discounts historically, averaging around 16%. Importantly, EMO recently announced a change in its dividend policy, transitioning to monthly payments, which currently yield approximately 9%. Nonetheless, investors need to be aware that distributions from MLPs can be volatile, and fluctuations in payouts are more pronounced than in traditional equity dividends.
Each of these funds presents unique characteristics that cater to different risk tolerances and investment strategies within the energy sector. While BGR provides a balanced exposure with a focus on options trading to enhance income, PEO is grounded in a long history of stability and quarterly distributions. Meanwhile, EMO targets midstream income generation through MLPs, emphasizing the necessity for careful assessment of dividend sustainability in light of market fluctuations. Furthermore, as energy prices are influenced by myriad geopolitical and economic factors, investors should remain vigilant about external conditions that may impact these investments’ performance.
In summary, as optimistic sentiments regarding the energy sector continue to grow, investors may find attractive opportunities within these alternative energy funds. The potential for higher yields presents a compelling case for leveraging CEFs in a well-diversified portfolio, particularly as traditional oil stocks seem increasingly overvalued in comparison. With the current discounts available and profound geopolitical factors at play, these investments could provide the necessary exposure to capitalize on the next leg of energy market cycles while delivering attractive income streams.